How to Cut Your Losses and Why It Is Important

How to Cut Your Losses and Why It Is Important

 

 

Losses in trading are inevitable. Learn from this article on how you can manage them…

 

Ghost month has finally began! Indeed, we have felt the effect of the volatility of the market for the past few days. Arguably, many traders have immediately became investors, fearing to let go of the stock that was bleeding too much. I can’t blame them, after all, that’s their hard-earned money.

 

Few days ago, I was asked by a colleague on how do I execute my stop loss and when to say that enough is enough. So I’ve written a blog out of it, so that everyone will be guided accordingly…

 

 

Do you want to know the cycles of the market? Read this blog: 4 Stages of the Market you should check and see.

 

 

The Whys…

 

 

 

1. It can minimize big losses.

 

In trading stocks,especially those that are very volatile, we need to be prepared on the risk that comes with it. However, even if the risk is given, it should be just a calculated risk.

 

One of the most enduring sayings  is “Cut your losses short and let your winners run.” Wise advice, but many investors/traders still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.

 

 

2. It protects the capital.

 

The mantra of trading is always to maximize the gain and protect the capital. That should be always be very clear to us as a trader. The greatest tragedy of a trader is when he sees his capital has slowly drowning and gets diluted.

 

Some have even got so depressed to the point that they have totally abandoned trading, sold their stocks, and have turned their backs from the stock market. We don’t want the same fate to happen to us, so we need to be always careful on our funds.

 

 

3. It manages the risk.

 

Cutting losses is selling your stocks that you have accepted you are wrong. The very fact that you’re able to acknowledge that, it is a good sign that you’ve already grown as a mature trader.

 

 

4. It helps you sustain.

 

The moment when I practiced cutting losses and sets-up trailing stops, that’s the time I started to experience closer to consistent trades. Many times, I’ve proven that I have made the  right decision. True enough, after selling them, it really did went down and took so long to recover!

 

 

Read this Blog: WHEN SHOULD I BREAK-UP WITH MY FAVORITE STOCKS?

 

 

So how do I set-up a stop loss?

 

 

 

1. 5-8% from the buying price.

 

 

This is easier to observe but often very hard to execute. Trading is not a gambling, it is a number’s game. Setting your stop loss and executing it when it says so, is definitely going to save your stock from the bigger loss that is going to happen. 

 

 

2. 5% below the support area from the buying price.

 

 

 

When your stock has broken a significant support, you need to treat it as a warning sign! However, some stocks would experience a bounce once buyers start to buy the stock. So giving an allowance of 5% will justify the bounce that is likely to happen but lower than that, I will already consider it as a break-down.

 

 

3. When the price is going below MA 200.

 

 

 

When a stock has broken-down MA 200,that means that the stock is entering the bearish territory. Thus making the stock weak and on downtrend. Once it will continue to go down further, consider selling it. We should always avoid stock on a downtrend!

 

 

4. Directional Movement Index (DMI).

 

 

This indicator is very helpful to me so that I can identify if the stock is already on downtrend. Directional Movement indicator is use to quantify the trend of the stock. When ADX (green) is above 30 and – DMI (red) is already above +DMI (blue) stock is on downtrend, it is time to sell it.

 

Steps: 

 

  1. Right click on the chart.
  2. Click indicators.
  3. Click Directional Movement Index.
  4. Check the settings and the labels. ( In this example, I already changed the colors)

 

 

Is this article helpful to you? Follow my page: 

 

Investambayan

 

 



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